To See How National Health Reform Could Play Out, Watch Massachusetts Carefully

In 2006, Massachusetts enacted a series of health reforms similar in many ways to those enacted at the national level in 2010. The state instituted an "individual mandate," an independent insurance "exchange," expansion of publicly funded health programs, and individual market reforms. The hope was to make insurance more affordable by adding more people to the insured pool.

That hasn't happened, because lawmakers forgot (or perhaps never bothered to learn) that most of an insurance premium derives from the prices paid out for medical services under the policy.

By insuring more individuals, the reform law increased demand for services, creating upward price pressure. Do you suppose a doctor with a waiting list of 1,600 individuals could afford to raise prices just a bit? Ya' think?

Insurers, taking such price increases into account, foresaw premium increases. But big premium increases didn't fit the nice political picture of How Things Are Supposed To Be, particularly when Massachusetts is the poster child for federal health reform eforts. A disaster in Massachusetts would take the momentum out of national efforts modeled on the same principles.

So to make it right, Massachusetts insurance regulators simply declared all of the premium increases "unreasonable" and denied them. (OK, not ALL - - just 235 out of 274.)

Now what do you get if you are an insurer and you have upward pressure on your expense side and a regulator has imposed a freeze on your revenue side? You get losses. Big time.

Here in New York we have heard this song before. A couple of times, actually, but most recently when it was revealed that Physicians' Reciprocal, a medical malpractice insurer, was more than $43 million in the hole and insolvent from an accounting perspective. Why? In no small part because Eliot Spitzer, before being drummed out of office for soliciting prostitutes, imposed a premium freeze on malpractice insurance rates. Like the Massachusetts freezes, that was done for political reasons. Like the Massachusetts freezes, the result is cash-strapped insurers.

Health care providers like to pretend that health insurers hold all the cards when in comes to negotiating price. Available data (again from Massachusetts) suggest otherwise. Networks sell policies, and in the case of sole hospitals in unpopulated areas insurers are virtually at the mercy of the hospital - - because without the hospital, the health plan can't sell any policies at all.

If all of this is true, Massachusetts hospitals should be sitting fat and happy under the new reform regime. And indeed they are.

Health plans are also boxed in by federal anti-kickback and antitrust laws, which prevent them in many cases from forging new relationships with providers or devising new payment methods that would incent quality over quantity.

As a result, there is very little, if any, downward pressure on the largest component of health insurance premiums - - the price of medical services. And so the costs go up - - and up and up and up. Even in places like Provo, Utah, where healthy residents live in an area dominated by a medical system famed for its quality-over-quantity intitiatives, the price of care is still soaring.

Massachusetts proves that spreading the pain over a larger pool of members still results in unbearable pain when no effort is made to control the cost of care. The federal reform effort is not much different. Health reform proponents point to a few measures in the bill that hint at cost control. This is tinkering, if you could even call it that.

The Obama administration will do its best in the coming months to prop up Massachusetts and to paint a rosy, rosy picture of health reform. It will do this to protect the Democrats in Congress who supported the measures and try to avoid bloodletting at the polls.

It will do this at the ultimate expense of the ultimate payors for health care services: you and I.

A free market would require health care providers to justify their prices to the ultimate payors - - their patients. The problem with health care is that the current market is anything but free. Unless and until we take steps in that direction, look for the cost of care to go nowhere but up.